4
Intent
• Create AAA Underlying Portfolio
• Create Default Resistant Portfolio
• Take advantage of sell side pressure
• Take advantage of negative perception of municipal bond market to amass AAA bonds
2. 2
The Case For AAA* Underlying Rated Municipal Bonds
Market Overview
Default Data
Non State AAA*
State AAA*
Bond Insurer Ratings
Strategy
Table of Contents
*Please see the end for important
Information regarding credit ratings
3. • 11 AAA States = $66.8 Billion total debt issued
2.3% Total Tax Exempt Bond Market
Standard & Poor's July 2010
• 169 AAA Non State Municipalities = $50.09 Billion total debt issued
1.75% Total Tax Exempt Bond Market
Standard & Poor's August 2009
• 45,000 Municipal Bond Issuers
• 1.5MM Municipal Bond Issues
• $2.85 Trillion Tax Exempt Bond Market
THE CASE FOR AAA UNDERLYING RATED MUNICIPAL BONDS1
3
Market Size
Diverse Market
Limited AAA
Quality Non-State
Supply
Limited AAA
Quality State
Supply
1Standard & Poor’s Underlying Ratings (SPURs) – provides a rating for a debt issue on a stand-alone basis, without credit enhancements.
While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition,
certain municipal bonds (such as Build America Bonds) are issued without federal tax exemption, which subjects the related interest income to federal income tax.
4. Strategy
AAA Underlying Portfolio
4
Intent
• Create AAA Underlying Portfolio
• Create Default Resistant Portfolio
• Take advantage of sell side pressure
• Take advantage of negative perception of municipal bond market to amass
AAA bonds
5. Municipal Bond Holders
5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
TOTAL DEBT OUTSTANDING 1,603.40 1,762.90 1,900.40 2,030.90 2,225.90 2,403.30 2,618.90 2,680.30 2,811.20 2,856.60
HELD BY:
Households 580.8 678.4 703.7 742.4 820.9 872 896 902.2 1,007.80 1,058.80
Mutual funds 253 277.3 290.2 294.3 311.7 344.4 372.2 389.6 480.2 532.8
Money market funds 276.7 278.5 292.1 313.8 336.8 370.3 471 494.6 401.3 331.6
Closed-end funds 74.7 86 89.3 89.1 89.4 89.4 91.3 78.5 81.8 82.7
Exchange-traded funds 0 0 0 0 0 0 0.6 2.3 5.9 7.8
Nonfinancial corporate businesses 29.3 32.1 35.4 31.8 32.1 28.1 29.2 26.6 26.1 25.7
Nonfarm noncorporate businesses 3.5 3.4 2.7 4.3 4.4 5.8 5.3 5.6 5.1 4.8
Government-sponsored enterprises 35.4 39.4 44.4 44.6 39.7 36.1 33.3 31.3 29.1 26.2
State & local government general funds 4 4.1 4.4 4.7 5 5.5 5.8 5.6 5.9 6.2
Rest of the world 8 11.5 19.5 26 29 34.4 45.1 50.5 60.6 52
Commercial banks 120.2 121.7 132.7 140.8 157.7 180.2 192.9 216.7 218.6 229.1
Savings institutions 4.8 5.8 6.6 7.4 9 11.2 11 7.8 9.2 10.2
Property & casualty insurance companies 173.8 183 224.2 267.8 313.2 335.2 371.3 381.9 369.4 371.1
Life insurance companies 18.7 19.9 26.1 30.1 32.5 36.6 41.4 47.1 73.3 76.7
State & local government retirement funds 1.7 0.9 4.4 1.8 1.7 3.3 2.4 1.4 1.5 1.6
Brokers & dealers 19 21 24.9 32 42.9 50.9 50.1 38.7 35.4 39.4
ISSUED BY:
State & local governments 1,294.40 1,438.40 1,558.80 1,672.60 1,843.90 1,997.00 2,187.40 2,238.20 2,348.50 2,388.30
Short-term 70.5 95.7 106.1 100.2 105.9 102.8 120.1 132.6 135.4 129.3
Long-term 1,223.90 1,342.60 1,452.70 1,572.40 1,738.00 1,894.20 2,067.30 2,105.60 2,213.10 2,259.10
Nonprofit organizations 151.3 163.9 177.7 189.1 205.2 224.1 241.2 249.3 264.3 266.3
Nonfinancial corporate businesses 157.7 160.6 163.9 169.2 176.8 182.2 190.3 192.9 198.3 202
*Figures for 2010 are as of Sept. 30, preliminary, and seasonally unadjusted. Dollar amounts are in billions of dollars. Components man not add to totals because of rounding.
Source: Federal Reserve Board, Flow of Funds Accounts, Flows and Outstandings, Third Quarter 2010.
6. Market Overview: Potential Municipal Bond Market Turmoil
6
Renowned Wall Street analyst Meredith Whitney has warned that the U.S. may
witness between 50 to 200 ―sizeable defaults‖ amounting to ―hundreds of
billions of dollars‖ among municipal and state governments next year, which
could derail the recovery.
Over the next twelve months, Whitney said, the U.S. government will be faced
with the onerous task of bailing out debt-ridden states that are struggling
financially. She compared the current fiscal health of city/state governments
with that of the banking industry prior to the Lehman Brother collapse.
7. Market Overview: Cash Flight Persists
7
Tax-exempt money market funds lost a sizable $2.09 billion, dropping total net assets to
$326.88 billion for the week ending Dec. 13 and erasing nearly all gains from the
previous week.
The outflows came on the heels of $3.41 billion of inflows (12/20/2010). The back-and-
forth followed two consecutive weekly outflows that saw total net assets fall to $328.97
billion.
The $494.4 billion municipal bond mutual fund industry reported $5.4 billion in market
losses on its holdings last week (12/20/2010), following a $7 billion loss the previous
week.
Since the industry peaked at $527.8 billion on Oct. 20, it has bled $33.38 billion, or 6.4%
of its assets.
Mutual funds, which own more than 17% of all municipal bonds, have been transformed
from a support for munis into a depressant.
The first 10 months of this year, investors entrusted an additional $32.2 billion to
municipal bond mutual funds, or 10% of issuance during that period.
Inflows abruptly reversed to outflows in mid-November. Funds have now reported $12.3
billion in outflows the past five weeks, as well as $17.9 billion in market losses.
8. Market Overview: Cash Flight Persists
8
Mutual funds that report their figures weekly posted a net outflow of $2.73 billion for the
week ended Dec. 15, according to Lipper Fund Market Insight. It was the fifth-
consecutive weekly outflow for municipal funds.
Redemptions from municipal funds lately have forced portfolio managers to sell bonds to
raise cash, contributing to the drubbing for municipals, which has pushed the yield on a
benchmark triple-A 10-year muni bond up 63 basis points since Nov. 10 — when the
drain began.
The four-week moving average for the period ended Dec. 15 for all municipal funds,
including those that report their figures monthly, was a nearly unprecedented loss of $2.3
billion. That’s the second-highest tally ever recorded. The record was set by the four-
week period that ended Dec. 8.
―There is no doubt that the demand side of the market has weakened,‖ according to R.J.
Gallo, a portfolio manager at Federated Investors.
Everyone is aware of the additional supply that will be dumped into the long end of the
tax-exempt markets as the Build America Bond program approaches its Dec. 31
expiration date, according to Gallo.
9. Market Overview: Situational Overview
9
U.S. state and local governments are currently experiencing financial stress at a
level that has not been seen for decades.
Given the prospects for limited economic and tax revenue recovery, the
scheduled phasing-out of federal fiscal relief for the states, and the likelihood of
continued state aid cuts and local property tax base weakness, pressures should
continue.
Credit stress can in many cases become more pronounced in the coming years.
Downgrade activity in the sector has increased and can continue to remain at a
higher level than we have seen historically.
10. Default: Historic Rates
Past performance does not guarantee future results. There is no assurance these trends will continue. Investing involves risk and you may incur
a profit or loss.
11. Default: Data
11
Government debt levels are relatively low, debt service is a relatively small part of
budgets, and bondholders’ claim on revenues for most debt is strong. Fitch evaluates a
state’s debt burden as a percentage of personal income and a local government’s debt
burden as a percentage of property value. The tax-supported debt of an average state is
equal to just 3% - 4% of personal income, and local debt roughly 3% - 5% of property
value. Debt service is generally less than 10% of a state’s or local government’s budget,
and in many cases much less.
Bond security is very strong for most debt issuances, and is provided for in state
constitutions, statutes, covenants with bondholders, and local ordinances. U.S. state and
local government bonds are usually secured by a general obligation of the issuer. For
local governments, this is generally accompanied by an unlimited property tax pledge
and such taxes are senior to the property’s mortgage obligation. Other commonly issued
municipal bonds are secured by a first lien on sales or income taxes, where there is little
if any legal discretion for the taxpayer to choose not to remit the taxes owed to the
government.
* Source: FitchRatings, U.S. State & Local Government Bond Credit Quality: More Sparks than Fire, November 16, 2010
12. 12
Default: Data
Debt service is a relatively small part of most budgets, so not paying
it does not do much to solve fiscal problems (particularly as
compared to the costs of such an action).
The vast majority of state government spending is for education and
social services (including Medicaid), as well as, to a much lesser
degree, corrections. Local government spending covers the wide
array of municipal services, including public safety, health care,
sanitation, transportation, and education.
There is a long record of governments making difficult choices to
maintain budget balance while making full and timely debt service
payments even in very stressful financial situations.
The officials managing the government’s cash, in their fiduciary
role, legally cannot just choose to pay other expenses as opposed to
debt service; the priority of payment is generally quite high, so that a
bondholder is well positioned even in financial stress.
• DEBT SERVICE
13. • BOND SECURITY
13
Default: Data
Security for general obligation and dedicated tax bonds is very
strong, and is provided for in state constitutions, statutes, covenants
with bondholders, and local ordinances.
For local municipal issuers, general obligation bonds are secured by
their power to levy and pledge property tax revenues for debt
service. Special tax bonds usually have very clearly defined,
segregated, or high priority payments in the flow of funds.
14. • DEFAULTS
14
Default: Data
The spreads on CDS's have been growing and the dollar amount of
CDS's on municipals has grown in the last year. That's a clear
warning sign that people are effectively starting to short the muni
market.
As of November 2010, there were 72 defaults totaling $2.5 billion,
down from 204 defaults ($7.3 billion) in 2009 and 162 ($8.2 billion)
in 2008.
15. Potential Legislative Reform
The Moment of Truth December 2010
The White House
Washington
Tax Free Municipal Bonds
Current Law: Interest exempt from income tax
Proposal: Interest taxable as income for newly-issued bonds
Result: This potentially could create a finite pool of tax free municipal bonds
15
While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition,
certain municipal bonds (such as Build America Bonds) are issued without federal tax exemption, which subjects the related interest income to federal income tax.
16. Lack of AAA Underlying Rated Supply
16
11 AAA States = $66.8 Billion total debt issued
169 AAA Non State Municipalities = $50.09 Billion total debt issued
For municipal bond fund shareholders, there is a dearth of bond availability…[there are]
no longer enough AAA-rated bonds.‖
There is relatively few bonds that are rated AAA based on the creditworthiness of the
underlying municipality or state.
17. 17
Non State AAA Municipalities
General & Special Obligation Bonds
Unlimited & Limited
18. AAA Municipalities Key S&P Data and Ratios
18
Municipality State Population
Household
EBI as % U.S.
Per capita
EBI as %
U.S.
Total market
value (Mil. $)
Per capita
market value
($000)
General fund
balance %
expenditure
Unreserved
fund
balance %
Total direct
debt (Mil. $)
Overall debt
% market
value
Overall debt
per capita ($)
Phoenix AZ 1,513,850 97 91 140,052,671 92,514 26.3 18.7 5,982,759 5.3 4,937
Denver City & Cnty CO 573,231 90 107 78,563,808 137,054 20.7 18.1 5,615,075 2.9 3,985
Charlotte NC 695,995 104 120 72,629,697 104,354 33.6 25.7 3,887,443 7.2 7,508
Columbus OH 732,084 86 91 46,572,521 63,616 18 15.4 2,986,633 6.8 4,334
Indianapolis IN 795,458 94 100 44,748,395 56,255 20.3 13.8 2,249,309 5.1 2,850
Minneapolis MN 382,400 88 103 42,343,170 110,730 18.7 18.2 1,343,596 3.5 3,845
San Jose CA 985,307 152 117 124,288,184 126,142 39.6 32.7 1,334,232 3.1 3,959
San Antonio TX 1,487,626 93 87 72,891,817 48,999 27.9 25.9 1,228,355 5.6 2,744
Scottsdale AZ 233,163 132 181 57,030,549 244,595 24.5 24.2 1,176,829 3 7,260
Virginia Beach VA 436,270 115 108 56,673,434 129,904 24.2 22.8 1,143,400 1.7 2,249
Raleigh NC 380,173 103 108 47,872,692 125,923 47.6 32.3 948,449 4.8 6,101
Lincoln NE 248,744 96 97 15,653,926 62,932 33.4 29.2 946,808 3 1,892
Omaha NE 440,691 89 94 26,509,936 60,155 11.1 10.4 879,211 4.9 2,915
Austin TX 752,666 97 107 76,455,461 101,580 15.4 14.8 836,398 2.4 2,470
Tempe AZ 172,039 98 102 18,421,003 107,075 57.1 54.5 732,125 4.6 4,964
Albuquerque NM 510,394 94 99 38,614,153 75,656 13.9 12.8 686,527 2.3 1,705
Seattle WA 586,200 106 139 121,621,131 207,474 51.6 31.2 670,303 1.6 3,287
Huntsville AL 173,189 97 117 18,551,563 107,117 39.5 33.5 662,359 2 2,116
St Paul MN 286,620 89 91 25,196,588 87,909 19.8 17.9 661,654 2.4 2,094
Pasadena CA 148,534 112 132 18,812,937 126,657 36.9 32.9 649,776 4.6 5,857
Winston-Salem NC 224,889 83 96 19,626,501 87,272 23.4 21.7 575,250 4.2 3,671
Des Moines IA 198,682 86 86 10,708,630 53,898 11.5 8.3 541,506 4.4 2,343
Oklahoma City OK 554,000 84 89 32,655,138 58,944 27.6 26.9 539,927 2.4 1,389
Oyster Bay NY 291,845 166 162 68,199,849 233,685 24.5 22 501,952 1.8 4,121
Greensboro NC 258,671 85 96 22,594,700 87,349 27.7 14.6 491,434 2.4 2,062
Chandler AZ 236,517 138 113 28,122,916 102,209 126.6 110.6 482,690 2.7 2,751
Stamford CT 119,009 130 153 34,402,454 289,074 3.9 2.9 435,693 1 2,955
Alexandria VA 141,675 142 191 34,379,163 242,662 13.9 13.2 397,515 1.2 2,806
Plano TX 261,500 169 172 24,825,573 94,935 22.6 17.8 371,310 6.6 6,272
Cambridge MA 102,229 113 141 23,876,058 233,555 44.4 39.8 370,082 1 2,437
Irving TX 210,150 99 104 20,882,115 99,368 19.9 18.4 355,850 5.8 5,759
Durham NC 210,230 91 95 17,131,530 81,489 26.2 12.7 351,215 2.7 2,211
Hempstead NY 735,833 146 121 117,374,501 159,512 59.4 57.8 334,691 1.9 3,076
Overland Park KS 168,673 137 145 17,987,917 106,644 85.4 81.4 308,706 3.7 3,957
Metro OR 1,614,465 92 99 207,455,844 128,498 59.2 44.9 285,429 1.2 1,537
Beverly Hills CA 35,803 170 277 18,198,107 508,284 64.1 51.3 283,830 2.8 14,147
High Point NC 99,955 88 91 9,074,880 90,790 29 17.7 271,684 2.8 2,570
Cary NC 130,716 164 148 13,915,372 106,455 66.7 49.7 251,730 3 3,209
Norwalk CT 84,231 132 145 20,898,752 248,112 13.6 13.2 250,282 1.1 2,764
Richardson TX 97,450 134 123 9,826,715 100,839 18.4 17.3 248,520 4.9 4,918
Rochester MN 100,845 112 115 8,721,459 86,484 43.4 42.4 245,070 3.2 2,798
Fairfield CT 58,100 181 192 17,057,835 293,594 5.5 4.4 241,192 1.3 3,682
Boulder CO 103,650 98 117 18,685,545 180,275 27.2 23.3 204,664 0.5 910
Santa Monica CA 90,589 123 212 21,122,724 233,171 62 28.2 198,233 2.2 5,028
Cerritos CA 52,096 162 114 6,824,297 130,995 235.4 107.1 182,300 3.3 4,343
19. AAA Municipalities Key S&P Data and Ratios
19
Municipality State Population
Household
EBI as % U.S.
Per capita
EBI as %
U.S.
Total market
value (Mil. $)
Per capita
market value
($000)
General fund
balance %
expenditure
Unreserved
fund
balance %
Total direct
debt (Mil. $)
Overall debt
% market
value
Overall debt
per capita ($)
Carrollton TX 120,553 141 120 9,086,432 75,373 22.5 21.8 176,990 5.7 4,256
Boca Raton FL 85,293 141 217 24,425,002 286,366 43.8 43 167,194 0.6 1,764
Southampton Twn NY 59,813 120 152 56,103,315 937,979 53.3 41.6 165,331 0.9 7,935
Southlake TX 27,635 298 233 5,226,037 189,109 57.6 56.7 165,107 4.9 9,324
Naperville IL 149,304 189 157 19,854,705 132,982 23 22.5 164,657 2.5 3,380
West Hartford CT 63,062 135 148 8,614,600 136,605 7 6.9 160,995 2.2 2,976
Bellevue WA 115,797 138 164 31,398,247 271,149 19.1 19.1 152,495 1.6 4,458
Charleston SC 104,053 86 106 16,615,314 159,681 24.9 24.8 148,206 2 3,210
Barnstable MA 46,906 109 124 14,544,783 310,084 17.1 15.6 145,433 0.6 1,821
Islip NY 327,241 143 106 42,900,000 131,096 74.4 38.3 137,040 0.3 418
West Des Moines IA 55,517 115 135 5,693,348 102,551 30.4 30.4 132,367 3 3,027
Huntington NY 204,000 171 162 44,457,887 217,931 65.5 12.3 130,990 1.3 2,741
Princeton Township NJ 16,609 201 257 4,832,799 290,975 6.7 5.7 116,212 4.8 13,954
Ridgefield CT 23,919 222 243 8,052,661 336,664 7.1 6.5 114,711 1.4 4,675
Rockville MD 63,170 163 151 10,543,205 166,902 31.7 28.7 112,197 2.4 4,076
Weston MA 11,606 315 338 4,855,540 419,268 10.9 5.6 109,613 1.1 9,445
San Ramon CA 59,002 209 201 14,992,249 244,821 103 101.2 103,262 2.5 6,052
Coppell TX 39,565 208 189 4,608,759 116,486 78.6 64.5 101,188 5.1 5,931
Charlottesville VA 40,000 75 89 5,296,137 132,403 25.4 24.1 99,511 1.9 2,488
Needham MA 28,702 184 201 7,637,636 266,101 16.2 6.2 98,811 0.8 2,139
Glastonbury CT 33,126 171 185 6,104,000 184,266 12.8 12.4 98,090 1.4 2,612
Lower Merion PA 58,554 189 263 14,792,823 252,636 24.3 23.9 96,570 3.2 7,960
Greenwich CT 62,076 214 302 47,641,597 767,472 -6.9 -8.7 91,529 0.2 1,474
Bedford MA 13,092 195 188 2,946,953 225,096 14.6 11.8 88,833 2.1 4,828
Clarkstown NY 82,082 170 151 16,219,233 197,598 15.4 11.6 88,320 1.4 2,765
Addison TX 14,088 111 175 3,724,827 264,397 42.8 41.5 86,440 3.4 9,048
West University Place TX 15,427 285 328 3,747,915 242,945 26.6 22.7 84,289 5.3 12,884
Wellesley MA 26,555 226 232 10,029,555 377,690 14.5 12.4 84,145 0.8 2,825
Bloomington MN 85,504 118 134 12,502,745 146,224 37.8 36.6 81,210 2.2 3,193
Yorba Linda CA 67,690 202 168 10,904,681 161,097 168.1 132.2 80,939 2.6 4,132
Camarillo CA 64,462 149 142 9,964,062 154,573 150.9 101.4 80,513 1.4 2,110
Edina MN 47,448 138 193 10,674,808 224,979 51.5 51.4 80,480 1.9 4,368
Mountain View CA 73,932 151 173 14,216,170 192,287 123.2 95.4 80,255 2.5 4,836
Troy MI 81,118 162 157 12,454,188 153,532 37.7 36.7 74,219 2.3 3,574
Redmond WA 51,320 152 167 12,753,636 248,512 25.8 25.8 74,170 2.3 5,796
Winchester MA 21,034 202 236 5,616,058 266,999 14.7 10.5 70,299 1 2,700
Northbrook Village IL 33,350 188 206 7,223,553 216,598 51.7 48.6 70,218 2.7 5,744
Coral Springs FL 127,312 138 118 10,397,223 81,667 53.5 52.7 69,960 0.8 678
Ridgewood Village NJ 25,508 215 237 6,503,504 254,959 11.8 8.9 67,504 1.8 4,581
Lake Oswego OR 36,924 139 176 9,444,931 255,794 55.3 55.3 66,775 1.5 3,862
Canton MA 21,980 146 148 4,487,450 204,161 8.1 7.1 65,696 0.9 1,824
Montville Twp NJ 21,564 182 184 5,436,262 252,099 18.6 11 65,457 1.3 3,322
21. AAA Municipalities Key S&P Data and Ratios
21
Municipality State Population
Household
EBI as % U.S.
Per capita
EBI as %
U.S.
Total market
value (Mil. $)
Per capita
market value
($000)
General fund
balance %
expenditure
Unreserved
fund
balance %
Total direct
debt (Mil. $)
Overall debt
% market
value
Overall debt
per capita ($)
West Hollywood CA 37,213 101 191 7,245,875 194,714 151.8 131.3 20,725 2.6 5,134
Weston FL 66,268 197 184 6,612,427 107,294 151.7 149.1 20,718 0.6 612
Peachtree City GA 36,643 163 138 4,952,193 135,147 44.2 42.7 20,671 1.6 2,218
Wyoming OH 8,372 189 180 886,345 105,870 41.2 38.1 19,856 3.7 3,874
Bowie MD 53,167 175 144 6,159,240 115,847 79.8 78.9 18,768 1.6 1,803
Westlake OH 31,972 141 177 4,323,339 135,223 137.5 104.1 18,623 1.4 1,828
Carlsbad CA 103,811 164 179 24,400,000 235,043 119.1 63.5 18,540 1.7 4,092
Malibu CA 13,632 219 296 9,295,365 681,878 106.2 105 18,271 1.9 12,881
Bernards NJ 26,904 247 250 5,452,590 205,797 60.1 51.9 17,805 1.4 2,882
Dover MA 5,641 140 149 2,311,929 415,964 22.3 14.4 17,045 0.8 3,022
Colleyville TX 23,587 242 224 3,446,562 146,121 50.7 50.7 16,275 2.6 3,827
Mill Vy CA 13,471 200 287 3,579,870 265,746 35.9 33.3 15,957 0.5 1,185
Mendham Twp NJ 5,596 279 293 2,132,489 381,074 36.3 27.5 15,318 1.8 2,720
Glencoe Village IL 8,584 317 382 3,327,822 387,677 25.3 14.1 14,740 2.3 8,779
Saratoga CA 32,308 285 291 8,755,510 271,001 60.6 60.1 13,890 2.4 6,520
Bunker Hill Vill TX 3,759 373 413 1,235,747 328,744 78.1 76.7 13,205 5.2 16,945
Sherborn MA 4,217 238 265 1,199,099 284,349 11.4 9.2 13,090 1.7 4,719
Hinsdale IL 17,940 218 265 5,525,313 307,988 16.3 15.7 12,805 1.9 5,892
Oakland Charter Twp MI 16,999 207 191 2,816,732 165,700 344.7 321.8 11,645 2.6 4,371
Sammamish WA 40,550 229 200 8,739,143 215,515 87.3 87.3 11,125 1.5 3,244
Lincoln MA 7,902 174 230 1,919,015 242,852 23.6 21 10,516 0.5 1,272
Solon OH 22,421 174 165 3,704,016 165,203 104.6 95 10,150 1 1,650
Great Neck NY 9,616 162 169 2,693,402 280,096 49 46.9 9,885 0.8 2,234
Inverness Village IL 7,302 278 329 1,639,401 224,514 213.9 213.9 9,500 2 4,401
Indian Hill Vill OH 5,893 302 371 2,814,873 477,664 25.6 23.2 9,360 1.5 7,265
Lake Forest CA 59,650 155 130 10,894,704 182,644 275.9 269.8 8,760 2 3,591
Creve Coeur MO 16,625 157 211 4,259,914 256,235 93.3 76.9 8,456 0.9 2,301
Woodcliff Lake NJ 6,005 268 273 2,245,069 373,867 38.6 16.8 7,280 1.6 6,002
Bannockburn IL 1,454 311 182 458,385 315,258 877.6 800.1 6,754 1.5 4,645
Town & Country MO 10,913 275 311 2,872,917 265,152 135 134.1 6,740 0.3 618
Laguna Beach CA 23,773 173 261 9,752,455 383,764 54.2 40.9 6,130 0.1 258
Olympia Fields Vill IL 4,631 180 179 548,074 118,349 33.1 30.9 6,110 4.8 5,676
Green Oaks IL 3,572 257 234 860,134 240,799 471.9 470.6 5,923 1.5 3,494
Bloomfield Hills MI 3,672 326 469 2,166,522 590,011 59.4 55.8 5,281 0.8 4,636
Ottawa Hills Vill OH 4,600 190 244 528,527 114,897 99 94.6 5,222 2.4 2,709
Del Mar CA 4,580 192 285 2,332,913 464,664 25.1 24.1 4,493 0.6 2,874
San Clemente CA 67,892 146 152 12,761,558 187,969 54.3 43.3 2,940 1.8 3,376
Minnetonka Beach Vill MN 660 281 396 319,644 484,309 71.4 66.9 1,110 0.4 1,682
169 22,725,706 3,013,362,706$ 37,153,725$ 50,086,755$ 718,105$
22. AAA Municipalities Key S&P Data and Ratios – by State
22
State
Total direct
debt (Mil. $) State
Total direct
debt (Mil. $)
AZ 8,374,403 IA 673,873
NC 6,859,114 AL 662,359
CO 5,819,739 OK 539,927
TX 3,747,887 NJ 441,765
CA 3,423,564 OR 352,204
OH 3,108,977 KS 308,706
MN 2,543,857 IL 290,707
IN 2,249,309 FL 257,872
NE 1,826,019 SC 148,206
VA 1,640,426 MI 144,220
CT 1,594,804 MD 130,965
MA 1,520,506 GA 107,884
NY 1,444,199 PA 96,570
WA 934,476 TN 79,224
NM 686,527 MO 78,466
50,086,755$
24. U.S. States Bond Ratings: Fitch, S&P, Moody’s
State Fitch Moody's S&P
Alabama AA-plus Aa1 AA
Alaska AA-plus Aa1 AA-plus
Arizona Aa3 AA-minus
Arkansas Aa1 AA
California A-minus A1 A-minus
Colorado Aa1 AA
Connecticut AA Aa2 AA
Delaware AAA Aaa AAA
D. C. AA-minus A1 A-plus
Florida AAA Aa1 AAA
Georgia AAA Aaa AAA
Hawaii AA-plus Aa1 AA
Idaho AA(Lease) Aa1 AA
Illinois A A1 A-plus
Indiana AA-plus (Lease) Aaa AAA
Iowa AAA(Implied GO) Aaa AAA
Kansas AA(Lease) Aa1 AA-plus
Kentucky AA-minus (Lease) Aa1 AA-minus
Louisiana AA Aa2 AA-minus
Maine AA-plus Aa2 AA
Maryland AAA Aaa AAA
Massachusetts AA-plus Aa1 AA
Michigan AA-minus Aa2 AA-minus
Minnesota AAA Aa1 AAA
Mississippi AA-plus Aa2 AA
Missouri AAA Aaa AAA
Montana AA-plus Aa1 AA
State Fitch Moody's S&P
Nebraska AA-plus
Nevada AA-plus Aa1 AA-plus
New Hampshire AA-plus Aa1 AA
New Jersey AA Aa2 AA
New Mexico Aaa AA-plus
New York AA Aa2 AA
North Carolina AAA Aaa AAA
North Dakota Aa1 AA-plus
Ohio AA-plus Aa1 AA-plus
Oklahoma AA-plus Aa2 AA-plus
Oregon AA-plus Aa1 AA
Pennsylvania AA-plus Aa1 AA
Puerto Rico A3 BBB-minus
Rhode Island AA Aa2 AA
South Carolina AAA Aaa AA-plus
South Dakota AA(Lease) AA
Tennessee AAA Aaa AA-plus
Texas AAA Aaa AA-plus
Utah AAA Aaa AAA
Vermont AAA Aaa AA-plus
Virginia AAA Aaa AAA
Washington AA-plus Aa1 AA-plus
West Virginia AA Aa1 AA
Wisconsin AA Aa2 AA
Wyoming AA-plus
Source: Bond Buyer as of July 1, 2010, State General Obligation ratings. Lease notation represents appropriation requirement
Please see the end for important information regarding credit ratings
25. 25
Bond Issuer Ratings
Currently, less than 10% of new municipal bond issues are insured, which is down from
about 50% in 2008. (Municipal Securities Rulemaking Board)
26. Bond Issuer Ratings
26
Insurer Moody's S&P Fitch Comments
ACA NR NR NR S&P Raised to B/Developing, then withdrew ratings at request of company on 12/15/08.
Ambac/5 Caa2 R NR Moody's placed on review for possible upgrade 3/26/2010. S&P assigned 'R' rating reflecting
Wisconsin State administrative oversight 3/25/10.. Fitch withdrew rating 6/26/08.
Assured Guaranty Aa3 AA+ NR Moody's affirmed with Negative Outlook on 12/18/09. S&P downgraded 10/25/10 with Stable
Outlook. Fitch withdrew rating at company request 2/24/2010.
Assured Guaranty
Municipal Corp./1
Aa3 AA+ NR Moody's affirmed with Negative Outlook on 12/18/09. S&P downgraded 10/25/10 with Stable
Outlook. Fitch withdrew rating at company request 2/24/2010.
Berkshire Hathaway AC Aa1 AA+ NR Moody's downgraded rating with stable outlook 4/8/09 S&P downgraded with Stable Outlook on
2/4/10.
CIFG/2 NR NR NR Moody's downgraded to Ca with Developing outlook, then withdrew rating 11/11/2009. S&P
withdrew 'CC' rating at company's request 2/17/2010.. Fitch withdrew rating on 10/20/08.
FGIC/3 NR NR NR Moody's downgraded to Caa3 Negative Outlook on 3/24/09, then withdrew rating. S&P lowered to
CC on 4/22/09 then withdrawn. Fitch downgraded 3/27/08 with Negative Outlook
National Public Finance
Guarantee Corp./4
Baa1 BBB NR Moody's confirmed rating with Developing Outlook on 6/25/09. S&P downgradeded 12/22/10 rating
with Developing Outlook. Fitch withdrew rating 6/26/08.
Radian Asset Ba1 BB NR Moody's affirmed with Stable Outlook on 5/6/2010. S&P Downgraded and kept on Negative
CreditWatch 11/24/09. Fitch removed rating on 5/2/08.
Syncora Guarantee/5
(formerly XLCA)
Ca R NR Moody's downgraded on 3/9/09 with Developing outlook. S&P downgraded CreditWatch Developing
on 11/19/08. Fitch withdrew rating on 9/5/08.
27. Strategy
AAA Underlying Portfolio
27
Upside
• Potential political targeting of tax exempt status on newly issued bonds
may create high demand for existing bonds
• Potential Future extension (2012 – beyond) of Build America Bond
Program may limit supply side for tax free bonds
• Large Defaults could create extreme selling pressure and a flight to AAA
quality
• Higher tax rates may create demand for tax-free investments
• Sell side pressure creating inefficient market; bids not reflective of yield/
quality
• Lack of Tax Shelters for wealthy individuals should continue demand for
tax exempt bonds
Upside
28. Strategy
AAA Underlying Portfolio
28
Upside
• Unprecedented AAA State default
• Willingness by State’s to target senior bond debt holders
• Legislative changes in General & Special Obligation definitions
• Legislative changes in tax exempt status for existing bonds
• A potential lack of federally subsidized bond programs
• The possibility of decreasing real estate values, high unemployment, and
higher default rates still exist.
Potential Challenges
29. Strategy
AAA Underlying Portfolio
29
Portfolio Creation
• Identify target bonds
• Identify yield curve advantage. 10, 20, 30 yr maturities
• Volume trading advantage. 100M,250M + purchase size
• Identify maximum investment amount per issue
• Determine approximate size of end portfolio
• Hourly monitoring of national inventory for targeted bonds
• Compile CUSIP number database for targeted bonds
30. Disclaimer
Past performance does not guarantee future results. There is no assurance these trends will continue. Investing
involves risk and you may incur a profit or a loss. Municipal bonds are subject to credit risk, the risk that the
bond obligor will be unable to make interest payments or repay principal when due .Municipal bonds sold
prior to maturity may result in a gain or loss of principal. Income from municipal bonds is not subject to
federal income tax but may be subject to AMT, state or local taxes. U.S. Treasury securities are guaranteed by
the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value.
Credit ratings are forward-looking opinions about credit risk. Standard & Poor’s credit ratings express the
agency’s opinion about the ability and willingness of an issuer, such as a corporation or state or city
government, to meet its financial obligations in full and on time. Credit ratings can also speak to the credit
quality of an individual debt issue, such as a corporate note, a municipal bond or a mortgage backed security,
and the relative likelihood that the issue may default. Issue credit ratings are based, in varying degrees, on
Standard & Poor's analysis of the following considerations:
• Likelihood of payment, capacity and willingness of the obligor to meet its financial commitment
on an obligation in accordance with the terms of the obligation;
• Nature of and provisions of the obligation;
• Protection afforded by, and relative position of, the obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
31. Disclaimer
Ratings assigned by Fitch are opinions based on established criteria and methodologies that Fitch is
continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no
individual, or group of individuals, is solely responsible for a rating. Ratings are not facts, and therefore cannot
be described as being "accurate" or "inaccurate". Users should refer to the definition of each individual rating
for guidance on the dimensions of risk covered by such rating.
Fitch's opinions are forward looking and include analysts' views of future performance. In many cases, these
views on future performance may include forecasts, which may in turn (i) be informed by non disclosable
management projections, (ii) be based on a trend (sector or wider economic cycle) at a certain stage in the
cycle, or (iii) be based on historical performance. As a result, while ratings may include cyclical considerations
and typically attempt to assess the likelihood of repayment at "ultimate/final maturity", material changes in
economic conditions and expectations (for a particular issuer) may result in a rating change.
Because it involves a look into the future, Moody’s credit ratings are by nature subjective. Moreover, because
long-term credit judgments involve so many factors unique to particular industries, issuers, and countries,
Moody’s believes that any attempt to reduce credit rating to a formulaic methodology would be misleading and
would lead to serious mistakes.
That is why Moody's uses a multidisciplinary or "universal" approach to risk analysis, which aims to bring an
understanding of all relevant risk factors and viewpoints to every rating analysis. Moody’s then relies on the
judgment of a diverse group of credit risk professionals to weigh those factors in light of a variety of plausible
scenarios for the issuer and thus come to a conclusion on what the rating should be.
